Bailout could cost $700B

Kevin G. HallMcClatchy Newspapers

Published Sunday, September 21, 2008

WASHINGTON -- The Bush administration on Saturday asked Congress for $700 billion in taxpayer money to get bad mortgage assets off the books of troubled financial institutions in a bid to end the U.S. economy's most serious financial crisis since the Great Depression, according to a draft of proposed legislation circulating in the capital.

The amount is staggering, and would likely hamper the ability of the next president to pursue new domestic programs without major tax increases. It also comes at a precarious time when the country is facing increases in spending as the nation's 75 million baby-boomers begin to reach retirement age in 2010.

As part of its proposal, the administration also asked Congress to raise the nation's debt ceiling from its current level of $10.6 trillion to $11.3 trillion.

Some Democrats were critical of the proposal, noting that it included no offer of relief for average mortgage holders. But they also promised to work quickly to have legislation approved next week that would allow the administration to begin buying up bad debt related to the country's falling housing market.

"This is a good foundation of a plan that can stabilize markets quickly," New York Democrat Sen. Chuck Schumer, chairman of Congress' Joint Economic Committee, said in a statement. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."

The top Republican in the House also voiced reservations about the plan. "We need to do everything possible to protect the taxpayers from the consequences of a broken Washington," Rep. John A. Boehner of Ohio said in a statement.

But he also warned against efforts to load up the legislation with additional provisions that would require debate. "Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve," he said.

Treasury Secretary Henry Paulson announced the plan to buy up bad mortgages on Friday, but provided no details on how the administration intended to make that happen.

The proposal circulated Saturday, a copy of which was posted on CNBC's Web site, added some detail, but still left unclear precisely how the government intended to take control of the bad loans or where the money would come from to pay for them.

Most precise was the expected cost $700 billion. But the remainder of the program would be left to Paulson to design, the proposed legislation said.

Under the proposed law, the Treasury Department would be authorized to purchase "mortgage-related assets from any financial institution having its headquarters in the United States."

That provision would seem to anticipate the possible purchase of individual mortgages as well as the complicated mortgage-backed securities at the heart of the current crisis.

It also would exclude many foreign-based banks and hedge funds from taking part in the program, though U.S.-based hedge funds, which invest on behalf of the ultra wealthy, would be able to participate.

Under the draft, Paulson, or his successor, would be required to report to Congress after three months, and then on a semi-annual basis until the assets had all been sold or liquidated.

The draft makes no mention of how the process of buying bad assets would happen, but it is widely believed to involve what's called a reverse auction process.

In a regular auction, a seller asks a starting price and bids go upwards. In a reverse auction, however, the buyer in this case the government agency asks for a price and sellers decide whether or not they will sell at the price and could even bid the price downwards.

Congress and the Bush administration are working through the weekend to craft legislation that would be voted on next week to allow Treasury unprecedented powers to help end a financial crisis that began in August 2007 and slowly gathered speed to reach hurricane proportions this week when the entire U.S. financial system was in panic by Thursday.

Democrats vow to push for legislation that will help keep homeowners from foreclosure, and some are pushing for a second stimulus plan along with the bailout package. President Bush has urged Congress to pass clean legislation and quickly.

But lawmakers seek to score points. Sen. Bernie Sanders, an independent from Vermont, called on Saturday for a surtax on the wealthiest Americans, who presumably have benefited during Wall Street's boom years, to help pay for the bailout.

Sanders proposed a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would yield more than $300 billion in revenue to offset some of the costs.